Climate Change Action Climate Change brochure [update] [f… · urgent policy action across countries to scale-up and shift public and private sector investments towards low-carbon,

OECD . 17

FinancingClimate Change Action

OECD work on

Financing Climate Change brochure 16pp [update 3]_Layout 1 04/11/2013 10:57 Page 17

“In the interest of the nextgeneration, we simply cannotafford to put climate change onthe back burner. In fact, one ofthe enduring lessons from theglobal economic crisis is that thelonger we wait to take decisiveaction, the larger the cost offinding a solution.” Angel Gurría, OECD Secretary-General

2 . FINANCING CLIMATE CHANGE ACTION


OECD . 3

Successfully tackling climate change requiresurgent policy action across countries to scale-up and shift public and private sectorinvestments towards low-carbon, climate-resilient infrastructure. An integratedframework with clear and stable climatepolicies, sound investment policies andtargeted financial tools and instruments isessential to overcome barriers to private sectorinvestments and address market failures.Scaling-up climate finance to developing

countries is a priority. This will requirestrengthened measurement, reporting andverification (MRV) systems to raiseaccountability and transparency, and improvedcountry systems to use climate financeeffectively. The OECD is assisting countries intheir domestic and international efforts tomobilise and track climate finance to ensure asmooth transition to a low-carbon, climate-resilient economy and greener growth.

FINANCING Climate Change Action

OECD work on

1. Scale-up climate financeflows and shift investmentto support green growth

2. Strengthen domestic policyframeworks in support oflow-carbon and climate-resilient infrastructure investment

3. Increase the financing for adaptation and REDD+

4. Track climate finance flows to and in developing countries to build trustthrough transparency andaccountability

Key challenges:


Successfully tackling climate changeacross developed and developingcountries requires urgent policy actionto bring about unprecedented economic,social and technological transformation.Delivering ambitious climate changegoals will require a significant scaling-upand shifting of today’s levels of supportfor climate action to address bothadaptation and mitigation.

Infrastructure investment decisionswill play an important role insuccessfully tackling climate change.Infrastructure vulnerability toinevitable climate change stems in partfrom the long operational lifetimes ofthese investments (Corfee-Morlot et al.,2012). Choices made today about types,features and location of new andrenovated infrastructure will lock infuture levels of emissions and theresilience of our economies to achanging climate. Adaptation andmitigation are likely to come at anextra cost compared to a business-as-usual scenario, but it is just a fractionof the finance needed for infrastructureoverall. It could help governmentsavoid large costs of inaction in the longterm (OECD, 2012a). There is anopportunity – and urgency – to buildmore of the right type of infrastructure.

To do this, we need to find ways to shiftthe investments now being made fromcarbon intensive to low-carboninfrastructure, and do this at scale.

Irrespective of climate change issues,investment in infrastructure in thecoming years needs to be scaled-upsignificantly to support broaderdevelopment and the economic growthagenda. In OECD countries, manyinfrastructure networks for water,electricity and transport are in need ofreplacement and upgrading. Indeveloping countries, partly due torapid urbanisation, a major part of theinfrastructure stock required to meetdevelopment goals is yet to be built.

In the face of growing infrastructureneeds and fiscal constraints, suchtransformational change will requirelarge-scale private investments. Publicfinancing alone will not be enough tomeet these investment needs. Thedomestic public sector plays and willcontinue to play the leading role toguide and “jump start” investmentwhen needed. Public engagementshould aim to address key marketfailures and externalities as well asdelivery of public goods, e.g. investmentin power grids to enable growth in new

renewable energy sources. Butachieving low-carbon, climate-resilient(LCR) development will require large-scale private sector engagement, in the face of growing infrastructureneeds and fiscal constraints. Limitedpublic financing should be used as a time bound catalyst to leverageprivate investments and to target costeffective activities unlikely to attractsufficient private funding on their own (e.g. capacity building, education and training, and technology researchand development).


Scale-up climate finance flows and shift investment to support green growth

Mobilise and shift public and private sources of investment

Barriers to private investment in green infrastructure

Domestic and international private investment in green infrastructure is still seriously constrained by market failures and specificinvestment barriers. The private sector is looking at the risk-return profile of projects. Private investments in infrastructure projectshave typically been constrained by high-upfront capital costs, sometimes low-returns and long investment timelines. Country-specificbarriers often limit the attractiveness of such investments, due to inadequacy of returns or unmanageable risk. In addition to traditionalinfrastructure challenges, green infrastructure projects have to deal with specific barriers that limit engagement of the investmentcommunity. This includes weak or partial environmental policy backdrop that fails to sufficiently price pollution and that in turndistorts the competitiveness and cost of clean versus polluting infrastructure projects (e.g. changes in feed-in tariff systems, lack ofcertainty on climate policies). Weak climate-related policies introduce regulatory risk and this raises uncertainty for private investors.Other barriers to investment include lack of familiarity, limited information and knowledge, and limited expertise on greeninfrastructure. Finally there is also a lack of appropriately structured financing vehicles to provide the risk-adjusted return profile thatprivate investors expect.

Forthcoming OECD work also shows that international investment in green energy is constrained by rising international trade andinvestment restrictions, e.g. through the use of local content requirements in solar and wind energy (OECD, 2013 forthcoming).

1Financing Climate Change brochure 16pp [update 3]_Layout 1 04/11/2013 10:56 Page 4

In an important step forward to scale upfinancing for climate change action, theCancún Agreements called on developedcountries to provide new and additionalresources for developing countries:

• USD 30 billion “fast start financing”over 2010-2012; and

• A longer-term goal of USD 100 billionper year by 2020 to come from publicand private sources.

North-South finance flows for mitigationstill represent a fraction of the totalfinance flows in the emitting sectors(Figure 1). In the 2009-2010 period,aggregate North-South flows formitigation and adaptation are estimatedin the range of USD 70 to 120 billionannually (Clapp et al., 2012). This ismainly from private sources (i.e. foreigndirect investment (FDI), other privateflows and investment, and finance flowsassociated with the carbon market).While there is still no formal agreementon what to count as climate financeunder the United Nations FrameworkConvention on Climate Change (UNFCCC)targets, the magnitude of the differentflows suggests that private finance willplay a critical role in the future (Clapp etal., 2012; World Bank/IMF/OECD/RDBs,2011), and steering private sectorinvestment is essential to successfullytackling climate change and greeningdevelopment pathways.

OECD . 5

Scale-up climatefinance flows todeveloping countries

Figure 1. Estimates of North-South finance flows for mitigation(latest year estimates 2009-2010, billion USD)

Mitigation - upper bound Mitigation share (%)

39 %

35 %

41-48 %

3 %

Bilateral Public

Multilateral Public

Export Credit

Private Flows

604020020406080100

Mitigation - lower boundEmitting Sectors

Source: Adapted from Clapp et al., 2012., compiled from various sources. Mitigation "lower" are lower boundestimates of bilateral and multilateral flows where mitigation is marked as a "principal" objective; "upper"are upper bound estimates where mitigation is marked as "significant" objective (in addition to the"principal" objective). The level of North-South flows to mitigation-specific activities is uncertain.

Explore the contribution of export credits to climate change finance

Greener export credits could help stimulate private investment in developing countries towards low-carbon development. Export creditagencies (ECAs) typically provide funds (direct loans) or guarantees to facilitate exports (OECD, 2011a). In recent years, the majority of themedium- and long-term official export credit flows from OECD countries have supported potentially carbon intensive sectors such astransport and storage (41%), industry (24%) and energy (10%) (OECD statistics on export credits, 2010). While information is not tracked onthe carbon intensity of these projects overall, the projects supporting renewable energies and cogeneration/district heating represent only atiny share of official export credits to the energy sector (USD 0.7 billion out of a total of USD 32 billion in 2009).

OECD member countries are taking active steps to introduce and maintain environmental accountability in official export credits and toaddress climate change issues. In a Sector Understanding on Export Credits for Renewable Energy, Climate Change Mitigation and Water Projects, ofthe September 2012 Arrangement on Officially Supported Export Credits (OECD, 2012b), OECD countries agree to provide adequate financialterms and conditions to projects in sectors significantly contributing to climate change mitigation, including renewable energy and highenergy efficiency projects, as well as water projects.


Governments have a central role to playto mobilise capital to low-carbon,climate-resilient (LCR) infrastructure inthe establishment of reform agendasthat deliver “investment grade policies”.To address barriers to LCR infrastructureinvestment, climate change policies andtheir effectiveness need to be consideredin a broader national policy context,including the enabling environment forinvestment and development. The OECDhas developed elements of a “greeninvestment policy framework” to helpgovernments create and improvedomestic enabling conditions to shiftand scale-up private sector investmentsin green infrastructure, to finance atransition to a LCR economy and greenergrowth (Corfee-Morlot et al., 2012; seeFigure 2). This policy framework canguide domestic reforms to steer use oflimited public funds while also enablingand incentivising private investment tosimultaneously deliver climate changeand local development goals.

The proposed approach towards a greeninvestment policy framework consists offive elements (see Figure 2):

(1) Goal setting and aligning policiesacross and within levels ofgovernment. This includes clear,long-term vision and targets forinfrastructure and climate change;policy alignment and multilevelgovernance, including stakeholderengagement;

(2) Reforming policies to enableinvestment and strengthen marketincentives for LCR infrastructureinvestment. This includes: soundinvestment policies to create openand competitive markets; andmarket-based and regulatorypolicies to “put a price on carbon”,remove fossil-fuel subsidies andcorrect market failures;


Strengthen domestic policy frameworks in support ofgreen infrastructure investment

Integrate climate and investment policies through a green investment policy framework

Figure 2. Towards a Policy Framework for Green Investment

1. Strategic goal setting and policy alignment

2. Enabling policies and incentives for LCR investment

3. Financial policies and instruments

4. Harness resources and build capacity

for an LCR economy

5. Promote green business and

consumer behaviour

2(3) Establishing specific financial

policies, regulations, tools andinstruments that providetransitional support for new greentechnologies, including: financialreforms to support long-terminvestment and insurance markets;innovative financial mechanisms toreduce risk or increase marketliquidity; and transitional directsupport for LCR investment;

(4) Harnessing resources and buildingcapacity. This includes R&D for greentechnology; human and institutionalcapacity building to support LCRinnovation; monitoring andenforcement; and climate risk andvulnerability assessment; and

(5) Promoting green business andconsumer behaviour. This includesinformation policies, corporatereporting and consumer awarenessprogrammes, and public outreach.

The elements of the policy frameworkare being refined and tested in differentsectors and country contexts throughspecific case study assessments.Country-specific case studies includefinancing low-carbon cities in China,renewable energy in South Africa andenergy efficiency in buildings in France.The OECD has also recognised theimportance of understanding the role ofdifferent institutional and financialactors in achieving low-carbondevelopment pathways. Public financeinstitutions appear to be an increasinglyimportant actor within the investmentand financing process. A strand of workis exploring the role and potential of anumber of these institutions infinancing the transition to a low-carbon,climate-resilient economy in OECDcountries.

Source: Corfee-Morlot et al., 2012.


Traditional sources of private capitalsuch as banks have increasingconstraints on their ability to supportlong-term investments due tofinancial turbulence, deleveraging andimpending financial regulations. Inthis context, institutional investorssuch as pension funds, insurancecompanies and sovereign wealthfunds could play a key role infinancing the transition to a low-carbon economy. In 2012, institutionalinvestors managed USD 83 trillion inassets in OECD countries, includingUSD 22 trillion (26%) from pensionfunds (which received USD 1 trillion inannual flows), USD 25 trillion (29%)from insurance companies and USD30 trillion (36%) from investmentfunds. However today, less than 1% ofOECD pension fund assets areallocated directly to infrastructureprojects and an even smaller slice ofthis goes to green infrastructure (DellaCroce et al., 2011a). Since the financialcrisis, interest in direct investment ispicking up. For instance,PensionDanmark has a dedicatedresearch team working on renewablesand infrastructure investments and isplacing up to 10% of its investments inthese areas.

Policymakers have an opportunity toact now. In the wake of the financialcrisis, institutional investors areredefining their investment and riskallocation strategies. The financialcrisis has highlighted many of the risksassociated with infrastructure, but it

has also provided an opportunity forthis asset class to mature in terms ofbuilding the experience of bothinvestment teams and investors andushering in more realistic risk andreturn expectations. Given theprevailing low interest rates and weakeconomic growth prospects in manyOECD countries, institutional investorsare increasingly looking for assetclasses which can deliver lowcorrelation, steady, preferablyinflation-linked, income streams.

In order to attract institutionalinvestment in low-carbon, climate-resilient infrastructure, several barriers to investment need to beaddressed, including:

• The absence or instability of policiesto address market failures whichcause the mispricing of suchinvestments in relation to existing,polluting technologies;

• A lack of suitable financial vehicles covering longer-terminvestment horizons;

• Misaligned performance incentiveswithin the investment chain;

• A lack of co-operation or poolingbetween investors to gain thenecessary scale;

• A general shortage of objectiveinformation and quality data toassess infrastructure transactionsand underlying risks, especially

OECD . 7

Tailor policy tools to specific investors, including institutional investors

for new investors less familiar with the characteristics of this typeof investment;

• Potential unintended consequenceson the availability of long-termcapital due to new financialregulations (e.g. Basel III andSolvency II; for details see Kaminkerand Stewart, 2012; Della Croce et al., 2011a).

Moving from the current mindset to alonger-term investment environmentrequires a change in investor behaviour,i.e. a new “investment culture”. Themarket, by its nature, is unlikely todeliver such a change. Major policyinitiatives are needed in a variety ofareas. Institutional investors need to bebrought into the debate with policymakers.

The OECD is developing policy guidanceon long-term investment focusing onthe role of institutional investors (seewww.oecd.org/finance/lti). As part ofthis, new work is providing policyguidance based on a set of case studies,including where green investments byinstitutional investors have deliveredthe necessary risk-adjusted returns(Kaminker et al., 2013; see alsoG20/OECD, 2012; Kaminker and Stewart,2012; Inderst et al., 2012; Della Croce etal., 2011b). The latest working paper(Kaminker et al., 2013) was transmittedto the G20 Finance Ministers andCentral Governors’ meeting on 10-11October 2013.


The case of sustainable transportTransport is the second largestcontributor to global greenhouse gas(GHG) emissions, largely driven by theroad sector. There is a need to scale-uptransport infrastructure investments torenovate existing infrastructure or tobuild new infrastructure in rapidlygrowing economies. To avoid lock-in intocarbon-intensive and climate-vulnerabledevelopment pathways, there is also aneed to shift investment towardssustainable transport infrastructure.However, the absence of pricingmechanisms for transport-relatedexternalities (GHG emissions, local airpollution and congestion) and theexistence of fossil-fuel subsidies favourinvestments in carbon-intensive roadtransport.

In order to help government addressmarket failures in the transport sector,the OECD has applied the fiveelements of a policy framework forgreen investment to the case ofsustainable transport infrastructure(Ang and Marchal, 2013). A keychallenge is to identify the appropriatemix of policy tools to better capturethe non-monetised costs and benefitsassociated with sustainable transportinfrastructure and improve the risk-return profile of sustainable transportinfrastructure projects.

The case of clean energy infrastructurein developing and emerging countriesEnhancing private investment in cleanenergy infrastructure will also requirerobust domestic policy frameworks.Drawing on recent work (Corfee-Morlot etal., 2012; OECD, 2006), the OECD hasdeveloped a non-prescriptive PolicyGuidance for Investment in Clean EnergyInfrastructure (OECD, 2013b). This reporthelps governments to identify ways toengage private enterprises in developingand financing clean energy infrastructure,especially in developing and emergingeconomies. Issues to consider include:

• Investment policy to support keyinvestment policy principles such asnon-discriminatory treatment ofcross-border clean energyinvestments, intellectual propertyprotection for clean energytechnologies, and transparency;

• Investment promotion andfacilitation to encourage cleanenergy investment through shiftinginvestment incentives away fromconventional energy and towardsclean energy;

• Competition policy to level theplaying field between independentpower producers (IPPs) and state-owned enterprises (SOEs);

• Financial market policy tostrengthen domestic financialmarkets and facilitate access to long-term finance; and

• Public governance in areasparticularly relevant for promotinginvestment in clean energyinfrastructure, such as thegovernance of electricity markets.

Other cross-cutting policy issuesinclude regional co-operation, trade andSOE governance measures to promoteclean energy infrastructure. The PolicyGuidance does not follow a “one-size-fits-all” approach and needs to betailored to specific country context. ThePolicy Guidance was included in theannex to the Communiqué of G20Finance Ministers at their October 2013meeting, with contributions from theWorld Bank and UNDP.

Ensure short-run investments inrenewablesMany OECD governments haveestablished ambitious targets for thepenetration of renewable energy. PastOECD work has examined the effectsof different policy measures (e.g. feed-in tariffs, renewable portfolio standards,

investment subsidies) on innovation inrenewable energy technologies (seewww.oecd.org/environment/innovation). However, those renewableenergy sources which have the highestgrowth rates – such as wind, solar andmarine power – are intermittent, withvariable and imperfectly predictablesupply. This poses significantchallenges for grid operators sinceelectricity supply and demand needs tobe in balance on a continuous basis. Inorder to address this issue investmentsin grid quality and transmissioncapacity are necessary in order toensure that investments in generatingcapacity actually enter the grid.Comparing the wind power generatingcapacity required to meet Europe’srenewable energy targets under threedifferent scenarios for grid capacity(low, baseline and high) shows that inthe absence of sufficient investment inthe grid, some of the capital invested in wind turbines will be “wasted” with adecrease of 15% in capacity factors; USD 70 billion more capital investmentwill be needed to meet renewableenergy targets for 2020 (Benatia,Johnstone and Hašcic, 2012).

In order to shift the world economyonto a low-carbon trajectory,investments will also be required inemerging and developing economies.The largest asset finance flows overthe period 2000-2012 for six differenttypes of renewable energy projects(wind, solar, geothermal, marine,biomass and small-scale hydro) fromOECD to non-OECD economies arefrom United States to Egypt (USD 714million) and Indonesia (USD 575million), followed by flows fromGermany to India (USD 527 million)and Egypt (USD 456 million). Japaneseflows to Kenya (USD 387 million) arenext (Cárdenas-Rodríguez et al., 2013forthcoming). Forthcoming OECD workwill analyse the policy drivers behindthese investments.


Tailor policy tools to specific sectors

Strengthen domestic policy frameworks in support ofgreen infrastructure investment continued2


Removing fossil-fuel subsidies

Removing fossil-fuel subsidies has the potential to help lower the global cost ofstabilising GHG concentrations, and improve countries’ fiscal balances throughreduced public expenditure and increased tax revenues. It would help shift theeconomy away from carbon-intensive activities, encourage energy efficiency, andpromote the development and diffusion of low-carbon technologies and renewableenergy sources. In 2011, fossil-fuel consumption subsidies amounted to USD 523billion in emerging and developing economies, while support for fossil-fuelproduction and consumption in OECD countries amounted to an estimated USD 55-90 billion per annum in recent years. Importantly, phasing out fossil-fuel subsidiescan pave the way for carbon-pricing policies by “getting the prices right”. Yet subsidyreform is politically challenging and can in some cases have negative impacts on low-income households who spend a higher share of their income on energy products.Subsidy reforms must be implemented carefully to ensure that any negative impactson household affordability are mitigated through appropriate measures (e.g. means-tested social safety net programmes). To achieve intended social benefits, it ispreferable to target the support directly at those who most need it, rather than tomaintain an across-the-board subsidy to all fuel users. Reforms should also becarefully sequenced and phased-in with advance notice to allow businesses andconsumers to adapt to the new market prices.

Source: OECD (2013a; 2012c; 2011e); IEA, OECD, OPEC and World Bank (2011, 2010); IEA (2011).

OECD . 9


Successful approaches to adaptationneed to be closely linked to developmentpolicies. OECD countries are workingtogether to integrate adaptation toclimate change into all theirdevelopment activities (OECD, 2009a). As part of this, they have started to trackclimate change adaptation related aid(see section 4). In 2010-2011, officialdevelopment assistance (ODA) bymembers of the OECD’s DevelopmentAssistance Committee (DAC) related toclimate change adaptation ranged fromUSD 3-9 billion.

Given that failure to adapt could stalldevelopment, particularly in thepoorest countries and communities, itis essential to ensure that adaptationinterventions are delivering results. The

OECD has surveyed existingapproaches used by development co-operation agencies and identifiedexamples of emerging good practice inthis area (Lamhauge et al., 2011). Giventhe long-term perspective of mostadaptation initiatives it is important toclearly include the effects of futureclimate change when selectingindicators and generating baselines.

The private sector has a key role to playin financing adaptation activitiesFront-running companies are alreadybeginning to invest in climate changeadaptation and responding to newopportunities (Agrawala et al., 2011).There are high levels of awareness ofclimate change, yet this does not alwaystranslate into action to manage the

resulting risks. As a result, there is astrong need to collaborate between thepublic and the private sector to facilitatethis process, for example by formingpartnerships with the private sector tohelp provide companies with robustinformation on climate risks and bybuilding regulatory frameworks whichencourage adaptation.

At the local level, recent analysis ofmicrofinance (Agrawala and Carraro,2010) in Bangladesh found that 70% ofexisting portfolios of the microfinancelenders analysed supported climatechange adaptation. In the longer term,these instruments have the potential tobe self sustaining, but there is a need forpublic funding to pilot new methods andinitiate new projects in the near term.


Increase the financing for adaptation and REDD+

Providing financial support for climate change adaptation in developing countries

Build capacity and experience to reduce emissions from REDD+ in developing countries

3

Finance for reducing emissions fromdeforestation and forest degradation(REDD) and for supporting “REDD+”(which also refers to conservation,sustainable forest management andenhancement of carbon stocks indeveloping countries) will be neededboth for capacity building (e.g.institutional and monitoring capacities)and for emission reductions directly.Emissions from deforestation aresubstantial, particularly in developingcountries, amounting to as much as 17%of global GHG emissions. REDD can beachieved relatively cheaply and couldpotentially reduce the overall cost ofglobal mitigation action by 40% (OECD,2009a). A well-designed mechanismcould also provide co-benefits forbiodiversity and poverty reduction(Karousakis, 2009). Mechanisms tosupport REDD+ will be essential as partof a cost effective and comprehensive

post-2012 agreement. Four key featurescritical to an effective REDD+ financingmechanism are (Karousakis and Corfee-Morlot, 2007):

• Establishing clear goals andobjectives;

• Ensuring sufficient and long termsources of finance;

• Developing eligibility andprioritisation criteria; and

• Ensuring accurate and consistentmonitoring and performanceevaluation.

Ultimately, market-based approaches tofinance REDD are likely to generatesignificantly larger, more sustainablefinance, than fund-based approaches.


OECD . 11


At the international level, currentmeasurement, reporting andverification (MRV) systems for climate-specific financial flows are limited andno single system provides a completepicture of climate finance flows.Tracking climate finance is difficult, asflows come from different sources(national and international, public andprivate), are provided via differentchannels (bilateral or multilateral) andhave different aims (Buchner et al.,2011a; see Figure 1). Furthermore,accurately tracking climate financeflows is complicated for both “political”reasons (there is no internationalagreement as to what should becounted), as well as “technical” ones(there are several different flows thatcould be relevant and may need to bedisentangled). Issues relating toconfidentiality of data can also impedeaccurate tracking of export credits andprivate sector flows. Developing a morecomprehensive framework for MRV ofclimate change support could usefullybuild on the UNFCCC NationalCommunications and review process, aswell as the statistical systems of theOECD’s Development AssistanceCommittee (DAC) and otherinternational statistical sources ofinformation (Corfee-Morlot et al., 2009).Increased use of standardised reportingformats would also help to improve theconsistency and transparency ofinformation provided (Ellis et al., 2011).

Building on existing systems to trackpublic financial flows The OECD DAC has a robust system formeasuring climate change-related aid:the Rio Markers on Climate ChangeMitigation and Adaptation. The RioMarkers are based on activity levelreporting to the DAC’s CreditorReporting System (CRS) which coversover 90% of all aid flows from OECDcountries and multilateral organisations(OECD, 2011c). The CRS system markseach aid activity that serves climate


Track climate finance flows to and in developing countriesto build trust through transparency and accountability

Strengthening MRV systems for climate-specific financial flows

objectives as either principal orsignificant in terms of targetingmitigation and/or adaptation.

Data on mitigation related aid have beencollected since 1998 and on adaptationfrom 2010. In future, these markers willbe extended to also apply to non-concessional development loans.

Mitigation related aid is increasing, withmore than USD 11 billion reported onaverage per year in bilateralcommitments in 2010-2011, with climatechange mitigation as the principalobjective. This rises to USD 16 billion ifflows with mitigation as a significantobjective are included (OECD, 2013c).Corresponding figures for adaptationrange from USD 3-9 billion. Since asingle activity (e.g. for REDD+) can targetboth mitigation and adaptation, the totalfor aid to climate change mitigation andadaptation needs to be adjusted to avoiddouble-counting. This leads to estimatesfor total bilateral aid for mitigation andadaptation of between USD 13 billionand USD 21 billion on average per yearin 2010-2011 (with adjustments foroverlap on both the lower and upperbound; see Figure 4).

Multilateral development finance(including concessional and non-concessional sources) is estimated toprovide a further significant share of

Figure 3. Trends in aid flows targeted at climate change mitigation and adaptation (DAC bilateral aid commitment, USD billion, annual averages over 2 years, constant 2011 prices)

2006-2007

Climate-related aid: “significant” objective

US

D b

illio

n (2

011

pri

ces)

Sha

re o

f to

tal O

DA

Climate-related aid: “principal” objectiveClimate-related share of total ODA

2008-2009 2010-20110

5

10

15

25

20

0

4%

8%

12%

18%

16%

2%

6%

10%

14%

4

climate finance; Multilateral DevelopmentBanks (MDBs) jointly report USD 4 billiontowards adaptation activities and USD 19billion towards climate mitigation in 2011(Joint MDB Working Group, 2012a, b). TheDAC Secretariat is working with MDBs toprovide a more complete picture of totalsupport.

The challenge of tracking private sector flowsThe Cancún Agreements explicitlyacknowledged the role of private financein contributing to climate goals. Yettoday, there is limited understanding ofthe total amount of private capital thatflows to low-carbon, climate-resilientprojects and programmes, and bettermonitoring tools are needed to assessprogress (Buchner et al., 2011a). At aminimum, MRV systems under theUNFCCC could be extended to includesome private climate specific flows, suchas those related to primary transactionsunder the CDM and/or to the leveragingratios of international public finance(concessional and non-concessional)(Buchner et al., 2011a). In addition, inpartnership with other organisations,the OECD is working on how to defineand measure green FDI, with a view topromoting a better understanding of thecontribution FDI can make to the shift toan LCR economy and the role policiesmay play in the greening of FDI (Golub etal., 2011).

Source: OECD DAC CRS system.


The need for an integrated MRV systemfor climate finance A broad framework for MRV of climaterelated financing could build on the OECDCRS system and provide information notonly on the source country or fund, but alsoon the destination, purpose (i.e. capacitybuilding, mitigation and/or adaptationoutcomes) and targeted sector. Asstipulated in the Cancún Agreements, sucha framework would ideally includereporting from both developed anddeveloping countries to provide informationon support provided and received (Buchneret al., 2011a; see Figure 5). Methodologicalwork is also needed on how to measure andassess the effectiveness of financialsupport, particularly in the case ofadaptation where there is an issue of howto assess progress. OECD work is alsounderway in this area.

OECD . 13

Figure 4. Composition of total bilateral climate change-related aid lower and upper bounds (DACbilateral aid commitments, USD billion, annual average over 2010 and 2011, constant 2011 prices)

Source: OECD DAC-CRS system.

Mitigation only

76%

58% 18% 24% USD 21 billion

14% 10% USD 13 billion

Overlap

Adaptation only

Lower bound:“principal” objective

Upper bound:“principal” and

“significant” objective

0 5 10 15 20 25USD billion (2011 prices)

Figure 5. The dimensions of climate finance

Source: Buchner et al., 2011a.

RecipientsInstrumentsIntermediariesSources - origin(country)

North-SouthPublicfinance

Public -private

Privatefinance

South-South

domestic

...

Climate + investment

policies Adaptation / mitigation

(or relevant sectors)

specific uses(e.g. sectorendpoint,

project type)

offset finance

grants

Bilateral

Multilateral

...

concessionalloans

capital

...

Mobilising public finance is essential, butonce available these funds will have to bemanaged efficiently and channelledtowards the most effective investmentsand activities. Some co-ordination acrossdifferent funds or delivery channels couldbe valuable to ensure the strategic goalsof the international community are metincluding the geographical distribution offunds and the balance of fundingbetween mitigation and adaptation.Delivery channels will also need to bedesigned to reach the poor who are alsooften most vulnerable to the impacts of

climate change. For example, foradaptation financing, working at thesub-national level is important andmechanisms such as microfinance merita closer look (Agrawala and Carraro,2010).

Lessons learnt from bilateral andmultilateral development assistanceactivities and global funds fordevelopment will be important ininforming future climate financingmechanisms (OECD, 2011b). Theselessons include:

• The need for developing countrypartners to exercise full ownershipof climate change funding andintegrate it within national financialallocation and budgetary systems.

• The need to align donor funds withdeveloping country systems. Externalfunding should be integrated withinthe domestic budget, including theuse of existing country systems forprocurement and public financialmanagement. Tracking theseresources in the national budget willhelp ensure that the use ofinternational climate finance issubject to scrutiny by parliaments,civil society organisations and otherdomestic institutions designed todeliver accountability. In other words,activities undertaken in response toclimate change should be country-driven and clearly based on theneeds, views and priorities of partnercountries.

• Harmonisation, co-ordination andlimited proliferation of climate fundsamongst donor agencies are alsoimportant to support the efficientuptake of finance, and will help toreduce overall transaction costs andincrease access by all types ofdeveloping countries to such funds.

Lessons from development finance to improve the effectiveness ofinternational financial support


• Agrawala, S., M. Carraro, N. Kingsmill, M. Mullan and G.Prudent-Richard (2011), “PrivateSector Engagement in Adaptationto Climate Change: Approaches toManaging Climate Risk,” OECDEnvironment Working Papers, No. 39,OECD Publishing, Paris.

• Agrawala, S. and M. Carraro (2010), “Assessing the Role ofMicrofinance in FosteringAdaptation to Climate Change”,OECD Environment Working Papers,No. 15, OECD Publishing, Paris.

• Ang, G., and V. Marchal (2013),“Mobilising Private Investment inSustainable TransportInfrastructure: The Case of Land-based Passenger Transport”, OECDEnvironment Working Papers, No. 56,OECD Publishing, Paris.

• Benatia, D., N. Johnstone and I. Hašcic (2012), “Increasing theProductivity and Penetration ofIntermittent Renewable EnergyPower Plants”.

• Buchner, B., J. Brown and J. Corfee-Morlot (2011a), "Monitoring andtracking long term finance tosupport climate action”, OECDPublishing/IEA, Paris.

• Cárdenas-Rodríguez, M., I., Hašcic, N. Johnstone, J. Silva and A. Ferey(2013, forthcoming), “Using PublicPolicy to Induce Private Finance forRenewable Energy Projects:Evidence from Micro-Data”, OECD Environment Working Papers,OECD Publishing, Paris.

• Clapp, C., J. Ellis, J. Benn and J.Corfee-Morlot (2012), “TrackingClimate Finance: What and How?,”Draft discussion documentprepared for the Climate ChangeExpert Group (CCXG) Global Forumon the New UNFCCC MarketMechanism and Tracking ClimateFinance, 19-20 March 2012, OECD.

• Corfee-Morlot, J., V. Marchal, C. Kauffmann, C. Kennedy, F.Stewart, C. Kaminker and G. Ang(2012), “Toward a Green InvestmentPolicy Framework: The Case ofLow-Carbon, Climate-ResilientInfrastructure”, EnvironmentDirectorate Working Papers, No. 48,OECD Publishing, Paris.

• Della Croce, R., P. Schieb and B. Stevens (2011a), “Pension FundsInvestment in Infrastructure: ASurvey”, OECD International FuturesProgramme, OECD Project onInfrastructure to 2030.

• Della Croce, R., C. Kaminker and F. Stewart (2011b), “The Role ofPension Funds in Financing GreenGrowth Initiatives,” OECD WorkingPapers on Finance, Insurance andPrivate Pensions, No. 10, OECDPublishing, Paris.

• Ellis, J., G. Briner, S. Moarif and B. Buchner (2011), “Frequent andFlexible: Options for ReportingGuidelines for Biennial UpdateReports, OECD Publishing/IEA,Paris.

• G20/OECD (2012), “G20/OECD Policy Note on Pension FundFinancing for Green Infrastructureand Initiatives”, developed by theOECD at the initiative of the G20Mexican Presidency.

• Golub, S., C. Kauffmann and P.Yeres (2011), “Defining andMeasuring Green FDI: AnExploratory Review of ExistingWork and Evidence,” OECD WorkingPapers on International Investment,No. 2011/2, OECD Publishing, Paris.

• Hammill, A. and T. Tanner (2011),“Harmonising Climate RiskManagement: AdaptationScreening and Assessment Toolsfor Development Co operation,”OECD Environment Working Papers,No. 36, OECD Publishing, Paris.

• IEA (2011), World Energy Outlook,International Energy Agency, OECDPublishing, Paris.

• IEA, OECD, OPEC and World Bank(2011), Joint report by IEA, OPEC, OECDand World Bank on fossil-fuel and otherenergy subsidies: An update of the G20Pittsburgh and Toronto Commitments,Prepared for the G20 Meeting ofFinance Ministers and Central BankGovernors (Paris, 14-15 October 2011)and the G20 Summit (Cannes, 3-4November 2011).

• IEA, OECD, OPEC and World Bank(2010), Analysis of the Scope of EnergySubsidies and Suggestions for the G-20Initiative, Joint report prepared forsubmission to the G 20 SummitMeeting, Toronto, 26-27 June 2010.

• Inderst, G., C. Kaminker and F. Stewart (2012), “Defining andMeasuring Green Investments:Implications for Institutional Investors'Asset Allocations”, OECD WorkingPapers on Finance, Insurance and Private Pensions, No. 24, OECDPublishing, Paris.

• Joint MDB Working Group (2012a),“Joint MDB Report on AdaptationFinance 2011”.


Relevant OECD references


• Joint MDB Working Group (2012b),“Joint MDB Report on MitigationFinance 2011”.

• Kaminker, C. et al, (2013) “InstitutionalInvestors and Green Investment:Selected Case Studies”, OECD WorkingPapers on Finance, Insurance and PrivatePensions, No. 35, OECD Publishing,Paris.

• Kaminker, C. and F. Stewart (2012),“The Role of Institutional Investorsin Financing Clean Energy”, OECDWorking Papers on Finance, Insuranceand Private Pensions, No. 23, OECDPublishing, Paris.

• Karousakis, K. (2009), “PromotingBiodiversity Co-Benefits in REDD”,OECD Environment Working Papers, No. 11, OECD Publishing, Paris.

• Karousakis, K. and J. Corfee-Morlot(2007), “Financing Mechanisms toReduce Emissions fromDeforestation: Issues in Design andImplementation,” OECD/IEA, Paris.

• Kennedy, C. and J. Corfee-Morlot(2012), “Mobilising Investment in Low Carbon, Climate ResilientInfrastructure”, OECD EnvironmentWorking Papers, No. 46, OECDPublishing, Paris.

• Lamhauge, N., E. Lanzi and S.Agrawala (2011), “Monitoring AndEvaluation For Adaptation: LessonsFrom Development Co OperationAgencies,” OECD Environment Working Papers, No. 38, OECDPublishing, Paris.

• OECD (2013, forthcoming),“Achieving a Level Playing Field forInternational Investment in GreenEnergy”, draft interim report, OECD.

• OECD (2013a), “Inventory ofestimated budgetary support andtax expenditures for fossil fuels –2013”, OECD Publishing, Paris.

• OECD (2013b), “Policy Guidance forInvestment in Clean EnergyInfrastructure”, an OECD report tothe G20, with contributions by theWorld Bank and UNDP.

• OECD (2013c), “OECD DAC statisticson climate-related aid,” November2013.

• OECD (2012a), OECD EnvironmentalOutlook to 2050: The Consequences ofInaction, OECD Publishing, Paris.

• OECD (2012b), 2012 Arrangement onOfficially Supported Export Credits.

• OECD (2012c), “An OECD-wideInventory of Support to Fossil-FuelProduction or Use”, OECD PolicyBrief.

• OECD (2011a), Smart Rules for Fair Trade: 50 Years of Export Credits,OECD Publishing, Paris.

• OECD (2011b), “DevelopmentPerspectives for a Post-CopenhagenClimate Financing Architecture”,OECD Publishing, Paris.

• OECD (2011c), “Tracking Aid in Support of Climate ChangeMitigation and Adaptation inDeveloping Countries,” September2011.

• OECD (2011d), Aid Effectiveness 2005–10: Progress in Implementing the ParisDeclaration, OECD Publishing, Paris.

• OECD (2011e), Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels,OECD Publishing, Paris.

• OECD (2010a), Taxation, Innovation and the Environment, OECDPublishing, Paris.

• OECD (2010b), Transition to a Low Carbon Economy: Public Goals and Corporate Practices, OECDPublishing, Paris.

• OECD (2009a), “Policy Statement on Integrating Climate ChangeAdaptation into Development Cooperation”, Joint High Level Meetingof the OECD DevelopmentAssistance Committee (DAC) and theEnvironment Policy Committee(EPOC), 28-29 May 2009.

• OECD (2008), Economic Aspects of Adaptation to Climate Change: Costs, Benefits and Policy Instruments,OECD Publishing, Paris.

• OECD (2007a), “Revised CouncilRecommendation on CommonApproaches on the Environment andOfficially Supported Export Credits”.

• OECD (2007b), OECD Principles forPrivate Sector Participation inInfrastructure, OECD Publishing, Paris.

• OECD (2006), Policy Framework forInvestment (PFI), OECD Publishing,Paris.

• World Bank/IMF/OECD/RDBs (2011),“Mobilising Climate Finance”, apaper prepared at the request of G20Finance Ministers.

OECD . 15


Climate change Robert Youngman – Mobilising private climate finance – ([email protected])Virginie Marchal – Private investment – ([email protected]) and Geraldine Ang – Private investment – ([email protected]) Jane Ellis – Tracking climate finance – ([email protected]) Christopher Kaminker – Institutional investors – ([email protected])and Osamu Kawanishi – Institutional investors and private investment –([email protected])Michael Mullan – Adaptation policy and development – ([email protected])Rob Dellink – Economic modelling – ([email protected])

Innovation and FinanceIvan Hašcic – Innovation and climate change – ([email protected])

Development Co-operationJan Corfee-Morlot – Climate change policy and finance – ([email protected]) Rémy Paris – Development and climate policy – ([email protected]) Julia Benn – Aid statistics, Development Assistance Committee, Creditor ReportingSystem and Rio markers – ([email protected])

Trade and AgricultureMichael Gonter – Export credits – ([email protected])Jean Le Cocguic – Export credits – ([email protected]) Jehan Sauvage – Fossil-fuel subsidies – ([email protected])

Financial and Enterprise Affairs Karim Dahou – Investment policy – ([email protected])

www.oecd.org/env/cc/financing

Contacts

Release date: 1 November 2013


Documents

Climate Change Action Climate Change brochure [update] [f… · urgent policy action across countries to scale-up and shift public and private sector investments towards low-carbon,